Dividend Payers Are Attractive Again as Bond Yields Fall

Investors once again are snapping up high-dividend-paying U.S. stocks as Treasury yields fall, which should keep utilities and telecom stocks near the top of the buying list for the near future.

The S&P 500 utility sector, whose dividend yield at 3.9 percent is more than 100 basis points above the 10-year Treasury yield, led the S&P 500's advance on Friday after concern about the launch of U.S. air strikes on Iraq drove the benchmark bond yield to 14-month lows.

The equity market recovered from early losses, in part due to news that Russia's Defense Ministry said military exercises near the Ukraine border had ended. Any global worries that keep a bid in government debt, meanwhile, will motivate investors to go after stocks with fat dividend yields.

The utility sector is up 8.8 percent since Dec. 31, the third best-performing sector for the year, following technology and healthcare. Telecom hasn't been as strong — gaining just 0.8 percent in the same period — but two of that sector's constituents, Windstream Holdings and Frontier Communications, have both gained roughly 40 percent.

Utilities hit a bout of profit-taking after ending the first half of the year in the No. 1 spot. The sector had risen 16.4 percent as of June 30, bolstered in part by the shares' high yields and the appeal of a safer sector at a time when investors were still a bit worried about economic growth.

Analysts say the attractiveness of high dividend-paying sectors such as utilities is not likely to end soon, especially with valuations still below the benchmark's level. The forward price-to-earnings ratio for S&P utilities is at 14.9, below the S&P 500's p/e of 15.2, Thomson Reuters data showed.

"The U.S. 10-year is an attractive yield given the backdrop of very weak yields around the world. Therefore, that does make the dividend-paying sectors increasingly attractive. That's been the footprint for this market," said Quincy Krosby, market strategist at Prudential Financial, based in Newark, New Jersey.

Overseas turmoil, particularly in Ukraine, has driven up demand for safe-haven bonds, also supported by the Federal Reserve's continued purchase of Treasuries while it gradually pares back its bond-buying program.

The S&P 500 utility sector shot up 2 percent on Friday, its biggest daily percentage gain since June. Earlier this week, the index flirted with correction territory as it lost nearly 10 percent from a high set June 30.

Also benefiting from the drop in bond yields are exchange-traded funds tied to dividend payers, including the Powershares Dividend Achiever exchange-traded fund, which rose 1.3 percent on Friday and is up 3.2 percent for the year.

The First Trust Morningstar Dividend Leaders Index Fund has performed better, gaining 1.2 percent on Friday and up 6 percent for the year so far.

The S&P telecommunications index has an even higher dividend yield than utilities, at 4.7 percent, though a smaller pool of stocks. The sector has been weak this year because of a lackluster performance by its biggest names, AT&T and Verizon.

However, network communications company Windstream Holdings has a dividend yield of 9 percent, the highest in the S&P 500, while Frontier Communications is third highest, with a yield of 6.2 percent, according to Thomson Reuters data. Those compare with the S&P 500's dividend yield of 2.4 percent. They have gained 40 percent and 37 percent this year, respectively.

"Where yield lies is where investors are continuing to go because there continues to be no alternative from other income-producing securities," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.